Casinos Seeing Signs of a Recovery

Highlighted stocks include Ameristar Casinos (ASCA - Snapshot Report), Boyd Gaming (BYD - Snapshot Report), Monarch Casino & Resort (MCRI - Analyst Report), MGM Mirage (MGM - Snapshot Report), Penn National Gaming (PENN - Snapshot Report), Pinnacle Entertainment (PNK - Snapshot Report) and Williams Industries (WMS - Snapshot Report).

Shares of MGM Mirage (MGM - Snapshot Report) soared nearly 37% yesterday after saying business conditions were starting to improve.

"Our resorts have seen sequential increases in occupancy levels through the first quarter and into April, and our forward booking pace is improving. This is allowing us the opportunity to better yield our room pricing," Chairman and CEO Jim Murren revealed.

This morning, Boyd Gaming (BYD - Snapshot Report) echoed the message.

"We're encouraged by some positive trends that developed during the quarter. In our Las Vegas Locals region, we began to see signs of stabilization", stated CEO Keith Smith.

The optimistic comments followed positive surprises from several other casino operators, including Ameristar Casinos (ASCA - Snapshot Report), Monarch Casino & Resort (MCRI - Analyst Report), Penn National Gaming (PENN - Snapshot Report), and Pinnacle Entertainment (PNK - Snapshot Report). Even gaming equipment maker Williams Industries (WMS - Snapshot Report) gave investors a reason to keep rolling the dice.

Marketing and Cost-Cutting Measures Paying Off

Revenues for most casino operators were down, as would be expected in the midst of a bad recession. A focus on marketing helped to limit the decline in gaming and lodging revenues, however.

For example, PENN credited "revenue enhancement" strategies by its managers for keeping net revenues just below last year's levels.

Cost-cutting at many companies helped to support profits, including ASCA. The company realized a record high in its quarterly adjusted EBITDA margins.

Expansion and Regulation Helping Outlook

A few companies said changes in state regulations helped, or were expected to help, gaming revenues.

ASCA and PNK particularly cited the repeal in Missouri's loss limit rule. Last November, a ballot initiative removed a prohibition on buying more than $500 of tokens or chips every 2 hours.

Several of the companies also suggested they were continuing to work on current projects and/or look for opportunities to expand. Such comments were well received not only due to the potential for future growth, but also because it suggests that the companies are adequately capitalized and/or have access to financing.

WMS Realizes Higher Gaming Revenues

Unlike the other companies mentioned in this article, WMS does not operate casinos. Rather, it designs and manufactures gaming machines. Therefore, I wanted to give its earnings report special attention.

The company sold fewer units during its fiscal third-quarter, but was able to realize higher revenues per machine. This led to record gross margins of 64.9% and its 17th quarter of double-digit year-over-year growth.

A key driver for WMS is high-return, high-earnings games. Given the economic backdrop, casinos are more focused on higher earnings games - a focus that helps both casinos and WMS alike.

Positive Surprises Translating Into Higher Forecasts

ASCA, MCRI, PNK and WMS all reported per share earnings that were above expectations. These positive surprises have, in turn, led to higher profit projections - a bullish sign.

ASCA beat by 19 cents. Nearly all of the 13 covering analysts raised their forecasts. The revisions pushed the consensus estimate 38 cents higher to $1.49 per share.

MCRI beat by 7 cents with profits of 6 cents per share. Positive revisions by all 4 covering analysts sent the consensus estimate 12 cents higher to 30 cents per share.

PNK beat by 10 cents with EPS of 8 cents per share. The positive surprise followed 3 previous quarters of disappointments. 11 of the 15 covering analysts raised their full-year projections, sending the consensus estimate 18 cents higher to 11 cents per share.

WMS beat by 6 cents, its 6th consecutive surprise. Nearly all of the 14 covering brokerage analysts raised their fiscal 2009 projections in response, sending the consensus estimate 9 cents higher to $1.53 per share.

MGM reported an adjusted loss of 6 cents per share, 2 cents wider than analysts expected. It's too early to tell what impact the CEO's comments will have on full-year forecasts.

This morning, BYD reported adjusted profits totaling 15 cents per share, 7 cents above the consensus forecast.

ASCA, MCRI, PENN, and WMS are Zacks #2 Rank ("buy") stocks. BYD, MGM and PNK are Zacks #3 Rank ("hold") stocks. All of them are classified in Leisure & Recreation-Gaming.

Related ETFs

There is one gaming ETF, Market Vectors Gaming (BJK). However, as I told Zacks ETF Trader subscribers yesterday, the funds' largest holdings are foreign companies. Therefore, it is not a good way to play the positive momentum in the Leisure & Recreation-Gaming group.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.